Friday, May 22, 2015

Is Equity Crowdfunding really Co-Op 2.0?

The New
Brunswick Securities Commission has recently changed the rules about raising
capital through the sale of securities (shares, bonds, debentures, warrants,
etc.) along with 5 other provinces.

The new
rules will allow companies to publicly raise up to $250,000 twice each year
without going through the hassle of creating the sizeable and expensive
prospectus documents that investors in large companies may be familiar with.

This
initiative has been driven by the ‘new economy’ of online companies who brought
us sales and donation based crowdfunding that has been operating online for
years. Securities regulators have, until
now, not endorsed these types of fundraising methods to sell ownership or debt
in a business.

If you were
to try to raise share capital for your new business you basically had three
options if you didn’t want to, or couldn’t afford to, create bulky prospectus
documents; ask your family and friends, ask people with whom you’ve done
business in the past, or ask an ‘accredited investor.’ Accredited investors are those very wealthy
people to whom the securities laws don’t apply because they’re deemed to know
enough to watch out for themselves.

In a May 18
article appearing in the Times & Transcript, a commentator from the startup
organization Planet Hatch is quoted as saying that the fundraising limit is too
low to really help a lot of internet startups.
I agree, but the crowdfunding rules from the securities commission are
about to change things in a whole new way.

In my 2014
Amazon best seller Invest Local, I
give very specific reasons why you should not want to be a shareholder in a
privately controlled corporation, especially if someone else had a large
‘control block’ of shares. There are far
safer ways to invest in small businesses for financial gain. I will repeatedly tell anyone who will listen
that buying shares of these small businesses, especially via this crowdfunding
technique is not a way to invest one’s money.
It’s very speculative... unless you have other motives.

While
$250,000 is not much money for a tech startup, it could mean life or death for
a restaurant, a sports bar, a corner store, a daycare or any number of real,
everyday, local businesses that you or I may wish to patronize. Drum-roll please. I’d like to introduce you to the
‘investomer.’

I first saw
this word a few weeks ago related to an American company who was helping
restaurants find funding via crowdfunding of equities. US rules also changed recently to allow this
option for small companies.

Putting the
idea out there that you want to build a new café in a certain location and
asking the neighbouring residents to invest via crowdfunding tackles several
problems at once for the small business owner:

You
get to raise money to pay for the costs of the business.

You
get to survey the market to see how many people REALLY want to see the business
open.

You
have the opportunity to develop a fiercely loyal customer base who share in the
excitement of the new enterprise.

The result
is a business with a self-interested owner, a profit motive and a highly
motivated and supportive customer base of ‘investomers.’ Who wouldn’t want to have a solid base of
customers who want to patronize the company and possibly share in the profits
down the road?

I believe
this will create a new era of community based businesses which will succeed
where co-ops often fail.

In my
opinion, the reason that co-ops fail is because there is no owner pushing to
ensure that the business works for the customers. In the last decade the Sobeys grocery chain
has built at least four new stores in Metro Moncton. The Co-op chain of grocery stores closed a
store and is down to one.

Crowdfunding
for shares in businesses could create a new era of small businesses built to
serve the needs of our communities which will be resilient and motivated to
grow rather than stagnate simply because they will have owners that want to
taste success.